2016 (8) TMI 560 - HC - Income Tax

Entitlement to claim under Section 80P - AO disallowed the claims of the assessee on the ground that the assessees had lent monies to the members who were undertaking non-agricultural/ non-farm activities and had received the interest on par with commercial banks - Held that - Commissioner of Income Tax (Appeal) and the Income Tax Appellate Tribunal has clearly held that the assessees are not co-operative bank and that their activities in the nature of accepting deposits advancing loans etc. carried on by the assessees are confined to its members only and that too in a particular geographical area. Therefore the respondent Societies are eligible for deduction under Section 80P (2) (a) (i) of the Act. The contention of the appellants that the members of the assessee societies are not entitled to receive any dividend or having any voting right or no right to participate in the general administration or to attend any meeting etc. because they are admitted as associate members for availing loan only and was also charging a higher rate of interest at the rate of 14% is not a ground to deny the exemption granted under Section 80P (2)(a) (i) of the Act. - Decided against the Revenue.

Summary

Issues Involved:
1. Entitlement for deduction under Section 80P (2) (a) (i) of the Income Tax Act, 1961 for interest received from Class B members involved in non-agricultural activities.
2. Classification of Class B members as members for the purpose of Section 80P (2) (a) (i) despite their lack of voting rights and participation in meetings.
3. Applicability of Section 80P (4) and 2(24) (viia) concerning loans for non-agricultural purposes.

Detailed Analysis:

Issue 1: Entitlement for Deduction under Section 80P (2) (a) (i)
The assessees, cooperative societies engaged in banking and trading activities, claimed deductions under Section 80P (2) (a) (i) of the IT Act, 1961, which were disallowed by the Assessing Officer. The Officer reasoned that the loans were given for non-agricultural activities and at commercial interest rates, thus not qualifying for the deduction. The Commissioner of Income Tax (Appeal) initially upheld this view, noting that the majority of higher-interest loans were given to Class B members who did not undertake agricultural activities. However, the Income Tax Appellate Tribunal (ITAT) reversed this decision, holding that Class B members are included in the definition of members under Section 2(16) of the State Cooperative Societies Act, 1983, thus qualifying the assessees for the deduction.

Issue 2: Classification of Class B Members
The Tribunal held that Class B members, despite not having voting rights or participating in meetings, are still considered members under the relevant cooperative societies act. The Tribunal found that excluding Class B members from the definition of 'members' for the purpose of Section 80P (2) (a) (i) would create an unjustified classification within the statute, which is not supported by the legislative language. This view was supported by previous Tribunal decisions and the Punjab and Haryana High Court, which emphasized that for the purpose of the deduction, the classification of members into 'A' or 'B' categories is irrelevant.

Issue 3: Applicability of Section 80P (4) and 2(24) (viia)
Section 80P (4) excludes cooperative banks from the benefits of Section 80P, but primary agricultural credit societies are entitled to these benefits. The Revenue argued that since the assessees lent money for non-agricultural purposes, they should be classified as cooperative banks. However, the Tribunal and appellate authorities found that the assessees' activities were confined to their members within a specific geographical area and did not equate to the activities of a cooperative bank as defined in the Banking Regulation Act, 1949. The Kerala High Court's decision in Chirakkal Service Co-operative Bank Ltd. vs. the Commissioner of Income Tax further supported this interpretation, confirming that primary agricultural credit societies are entitled to the exemption under Section 80P (4).

Conclusion:
The High Court upheld the Tribunal's decision, affirming that the assessees are entitled to deductions under Section 80P (2) (a) (i). The classification of Class B members as members for the purpose of the deduction was deemed correct, and the activities of the assessees were found to be consistent with those of primary agricultural credit societies, not cooperative banks. The substantial questions of law were answered against the Revenue, and the appeals were dismissed at the admission stage.